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There are many criticisms of corporate share buybacks, but Warren Buffett is certainly not one of them.
In its latest annual letter to shareholders, the Oracle of Omaha revealed that its holding company, Berkshire Hathaway (BRK-A, BRK-B), has spent nearly $ 25 billion to buy back Class A shares. Buffett said the action “demonstrated our enthusiasm for the spread of Berkshire” from large holdings, which include large companies like Apple (AAPL), Bank of America (BAC), Coca-Cola (KO) and Merck (MRK) .
“Berkshire has repurchased more shares since the end of the year and is likely to reduce its number of shares further in the future,” Buffett said, building on his affinity for the controversial practice.
The legendary billionaire investor was so effusive in his praise of buyouts that he referred to an old quote attributed to Mae West, the “sultry” actress of the 20th century: “Too many good things can be… wonderful.”
According to Buffett’s logic, the buybacks were carried out to “improve intrinsic value per share for permanent shareholders and would leave Berkshire with more than sufficient funds for any opportunities or problems it might encounter.”
He criticized companies that buy back stocks “at any cost”, calling the strategy “embarrassing” and the exact opposite of what Berkshire likes to do.
He cited Apple stock – which he first bought in late 2016 for a cost of $ 36 billion – as an example where his approach paid literal dividends. As of July 2018, Berkshire held more than one billion adjusted shares by division of the iPhone maker, or 5.2%, at a cost of $ 36 billion.
“Since then we have both enjoyed regular dividends, averaging around $ 775 million per year, and also – in 2020 – pocketed an additional $ 11 billion by selling a small portion of our position,” he said. he writes.
“Despite this sale – voila! – Berkshire now owns 5.4% of Apple, ”said Buffett. And because Apple has continually repurchased its own stock, it has increased the value of Berkshire’s holdings and helped increase shareholder value.
“Because we also bought back Berkshire shares over the past 2.5 years, you now indirectly own 10% more of Apple’s assets and future earnings than in July 2018,” the investor said.
“The redemption calculation slowly fades, but can be powerful over time. The process provides a simple way for investors to own an ever-growing share of great companies, ”he added.
With the COVID-19 pandemic as a backdrop, 2020 has been a difficult year for share buybacks, which are regularly highlighted by politicians and even some on Wall Street. As a Democratic candidate, President Joe Biden called on companies to end the practice, a call many have heard during a tumultuous year.
In the third quarter of 2020, company buyouts totaled $ 101.8 billion, according to data from S&P Global. That figure represented a rebound of 14.8% from the second quarter, which was the worst year for share buybacks since 2012.
However, 2021 has started off on a high note, as companies take ownership of their own stocks at a rapid pace. Bank of America analysts said last week’s weekly buybacks were the largest since February 2020, led by tech companies, but still followed 35% lower than the comparable period of the previous year.
Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek
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